You are considering becoming a hedge-fund manager, and will make your living by charging your clients a fee for managing their money. You are considering two payment schemes: a "no-load" scheme whereby you charge each client an annual fee that is a relatively high percentage of the amount of money you manage for them, or a "front-load" scheme in which you charge investors a very large one-time fee for each dollar they invest, followed by a very low annual fee.
a. If your investors are overconfident in your ability to generate abnormally high returns, which scheme can potentially generate the highest profit for you? Explain.
b. If your investors are a group of very conservative pessimists, which scheme can potentially generate the highest profit for you? Explain.